How Donald Trump’s tariff war hits Uganda’s wallet

In what he boldly called “Liberation Day,” President Donald Trump unveiled a sweeping list of tariffs targeting countries with which the United States runs significant trade deficits.

Framed as a decisive move to rebalance global trade and protect American industries, Trump’s announcement marked a return to an era of economic nationalism—one that harks back to the turbulent policies of past presidencies.

“For far too long, other nations have taxed our exports while flooding our markets with cheap goods. Today, that ends,” Trump said during the televised address. The new tariffs, though unspecified in exact figures during his speech, are designed to penalize countries that levy high duties on U.S. goods while enjoying open access to the American market.

The logic, Trump argues, is twofold: to reduce the U.S. trade deficit and retaliate against what he sees as unfair trade practices. What President Trump is doing, was done by some of his predecessors; most notably, Herbert Hoover during the Great Depression, and Richard Nixon during the economic crisis of the 1970s.

In the 1930s, Hoover raised tariffs by 20 percent to protect American industries from foreign competitors during the Great Depression. While in the 70s, Richard Nixon imposed a 10 per cent tariff on imports after he unpegged the US dollar from gold.

This collapsed the Bretton Woods financial system: where all the world’s currencies were pegged to the US dollar, which was in-turn tied to gold. After US reserves couldn’t support the dollars that West Germany and France wanted to redeem for gold, the financial system collapsed ushering in the fixed exchange rate system as we now know it.

This whole scenario and how it played out has come to be known as the Nixon shock. In hindsight, the effects of tariffs have been adverse as they’ve led to trade wars, recessions, the Second World War, and the collapse of the Bretton Woods financial system.

The ongoing tariff war is already showing signs of altering the global financial system, as we know it.

US/UGANDA TRADE RELATIONSHIP

Per the Bank of Uganda, in FY 23/24, Uganda’s exports to the US were valued at $94.70 million. In the last 10 years, since FY 14/15, their value amounted to $568.27 million with FY 23/24 being the peak year for US exports.

Inversely, imports from the US in FY 23/24 added up to $175.19 million. In the 10 years leading to FY 23/24, imports from the US to Uganda added up to $1.2 billion, with the highest volume arriving in FY 21/22 at $224.60 million.

Simply put, in the last decade, Uganda has had a trade deficit of $696.5 million with the US. Logically speaking, Uganda should be the one slapping a higher tariff on the US to cover the deficit, and not the other way around. The Pearl of Africa’s main exports to the US are coffee, vanilla, cocoa beans, casein, and fish.

WHAT IS THE EFFECT OF USA’S 10% TARIFF ON UGANDA’S ECONOMY?

Coupled with the shutdown of USAID that brought in close to a billion dollars annually into the Ugandan economy; the 10 per cent tariff imposed on Uganda’s exports to the US is going to decrease the circulation of the dollar in the economy and effectively raise its value against the shilling.

This will put pressure on the country’s international reserves, and lead to the depreciation of the Uganda shilling causing inflation. More so, a drop in the reserves strains the country’s ability to honour its international obligations and service its debts.

With the world on the verge of a recession, at a time when the government is in the middle of finalising the budget for the FY 25/26, Trump’s tariff policy creates a massive funding problem.

This is because there’s a lot of uncertainty globally and countries are looking to keep their economies afloat, like in the time of the pandemic, and are going to be more frugal with the distribution of largesse to countries like Uganda.

In the 2023/24 financial budget, budget support, grants, and loans contributed to more than 27 per- cent of the whole budget. To bypass this hurdle, the government is going to look inward to finance the budget.

As a consequence, there’s going to be a huge crowding out effect since the government is going to be competing for credit with the public, and the end result of that — high lending rates.

The upside to this is that the bond market is going to be robust with a promise of high yields for bondholders. The paramount drawback of a robust bond market is: that the national debt is going to rise sharply.

Despite the challenges, there’s a silver lining to this situation which is, coffee and vanilla, the main exports to the US are going to rake in more revenue. As is, the US cannot grow enough coffee and vanilla to satisfy its domestic market.

For one, they thrive in the tropical heat, and under humidity: the only places they could grow are Hawaii and California, even then, it’d still be a drop in the ocean when compared to the demand in the US market.

Also, the second biggest exporter of coffee — Vietnam has a 46 per cent tariff on its exports making its coffee pricey; whereas Madagascar which is the leading exporter of vanilla is under a 47 per cent tariff.

Both Uganda’s coffee and vanilla have a 10 per cent tariff, this automatically makes them cheaper for the American buyer, giving Uganda a competitive advantage over her contenders.

Because Uganda does very little trade with the US directly; the effects of the Liberation Day tariffs are going to be indirect, because they’re going to be passed down to Uganda from the countries it heavily imports from, that is, China and India.

In the last financial year alone, Uganda’s imports from China added up to $ 1.9 billion, while imports from India totalled up to $ 918.5 million. Presently, the tariff on China’s exports to the US stands at 145 per cent, while India’s exports to the US are charged a 26 per cent duty.

To offset the pressures caused by the trade war within their economies – China, and India are going to raise prices for their exports. This will cause a decline in the volume of international trade for Uganda, and eventually lead to inflation because our industries depend on intermediary goods from China, and India.

Dr. Isaac Shinyekwa, a senior research fellow, and head of Department -Trade and Regional Integration, Economic Policy Research Centre, believes that “The liberalisation phase of the global economy is going to face a reality check”.

He is convinced that “the intention of Trump is to bring countries to the negotiating table, and he’s partly achieving that objective, albeit with a lot of turbulence.

He asserts: “In international economics when a country increases tariffs on your goods, you have the right to retaliate on theirs. President Trump’s justification for imposing these duties is that the US didn’t take action when tariffs were increasing on her goods, and that is the reason for her trade deficit”.

“There’s going to be a reduction in aggregate demand in countries the US imports from, because of an increase in prices, he said. There’ll be a drop in incomes as those who were making money from trade with America will have their revenues reduced since natives won’t be buying as much as they were in the past”, observed Shinyekwa.

“Even countries under AGOA like Kenya are going to make losses because there’s going to be a drop in demand for their products in the American market”, he continued.

“Luckily, Uganda doesn’t do a lot of trade with the United States, so, the effects are going to be ripple in nature because its biggest trade partners – China, India, and South Africa, are in the eye of the tariff storm”.

The senior research fellow notes that concerning the effect these events will have on the shilling, “the central bank is going to face the challenge of stabilising the exchange rate to make sure it doesn’t violently react”.

To address the funding pressure that these events are going to exert on the establishment, the trade policy specialist advises: “As a way out, the government should look to international sources for borrowing other than crowding out the local market because that will reduce pressure on local banks and in the long run reduce lending rates.

“What government borrows from outside the economy circulates within, in addition to the money that was already in the system causing growth”, he concluded.

Ultimately, as the US tariff policy takes a new form every passing moment, the latest development being that on top of Trump pausing the tariffs for a 90-day period for all countries except China, he has had its duties ramped up to 145 per cent.

Additionally, he has reduced taxes on semiconductors and electronics from China to 20 per cent, and in retaliation, China has put a 125 per cent duty on all US imports.

It has gone ahead to suspend the shipping of certain rare earth minerals to the US whilst insisting that the world’s biggest economy completely cancel import duties.

Nevertheless, the 90-day tariff pause doesn’t make the situation any better for Uganda because her biggest trade partner — China, is getting the rough end of the stick, and the aftershocks of that directly trickle down to the Pearl of Africa’s economy.

As long as China is involved in this trade war, Uganda is far from being in the clear.

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